Principles of environmental and natural resource economics

Environmental and natural resource issues are considered in a broad, interdisciplinary context that does not treat them as just another subset of applied economics.The main subject areas

PRINCIPLES OF ENVIRONMENTAL ECONOMICS

This text offers a systematic exposition of environmental and natural resource economics It presents theeconomic and ecological principles essential for a clear understanding of contemporary environmental andnatural resource issues and policy considerations Environmental and natural resource issues are considered

in a broad, interdisciplinary context that does not treat them as just another subset of applied economics.The main subject areas include:

• basic economic concepts specifically relevant to environmental economics

• the economics of natural resource scarcity

• ecology, economics and the biophysical constraints to economic growth

• ecological economics

• the economics of sustainable development

• the economics of pollution

• valuing the environment

• the economics of natural resources

• population, development and the environment

The author develops specific tools to illuminate the central problems of environmental economics.Fundamental economic concepts specifically relevant to environmental and resource economics areintroduced and then integrated with ecological principles and approaches This text presents an integratedunderstanding of environmental and resource economics that acknowledges the disciplinary tie betweeneconomics and ecology

This student-friendly textbook contains a variety of study tools including learning points, boxed features,

case studies, revision questions and discussion questions Written in a clear and accessible style, Principles

of Environmental Economics considers a variety of real-world examples to illustrate the policy relevanceand implications of key economic and ecological concepts

Ahmed M.Hussen is a Professor and Chair of the Department of Economics, Kalamazoo College,

Michigan, USA

PRINCIPLES OF ENVIRONMENTAL ECONOMICS

Economics, ecology and public policy

Ahmed M.Hussen

LONDON & NEW YORK

First published 2000 by Routledge

11 New Fetter Lane, London EC4P 4EE This edition published in the Taylor & Francis e-Library, 2005.

“To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to

from the publishers.

British Library Cataloguing in Publication Data

A catalogue record for this book is available from the British Library

Library of Congress Cataloging in Publication Data

Hussen, Ahmed M.

Principles of environmental economics: economics, ecology and

public policy/Ahmed M.Hussen.

p cm.

Includes bibliographical references and index.

1 Environmental economics 2 Ecology 3 Environmental policy.

I Title.

HC79.E5H875 1999

333 7–dc21 99–17809 CIP ISBN 0-203-45581-9 Master e-book ISBN

ISBN 0-203-76405-6 (Adobe eReader Format) ISBN 0-415-19570-5 (hbk) ISBN 0-415-19571-3 (pbk)

part one THE ªPREANALYTICº VI SION OF NATURAL RESOURCES: THE

1 The concept of resources and resource scarcity: an economic perspective 2

1.5 Applying the concept: ecotourism, cattle ranching and the economy of Costa Rica 8

part two MARKETS, EFFICIENCY, TECHNOLOGY AND ALTERNATIVE

2 Resource scarcity, economic efficiency and markets: how the invisible hand

2.2 Basic assumptions 15

2.3 An interpretative analysis of demand, supply and market equilibrium price 16

2.4 Evaluating the performance of a perfectly competitive market economy 21

3 Market signals of natural resource scarcity: resource price, rent and

3.2 The demand for a factor of production: the case of natural resources 35

3.3 Key variables affecting the supply of a factor of production: the case of natural

resources

37

3.5 Rent and extraction cost as alternative measures of natural resource scarcity 40

4 The concept of natural resources: an ecological perspective 53

v

4.3 Ecosystem function 55

4.3.2 Succession, equilibrium, stability, resilience and complexity 57

part four FUNDAMENTALS OF THE ECONOMICS OF ENVIRONMENTAL

5 The market, externality, and the ªoptimalº trade-off between environmental

5.2 The economic process and the assimilative capacity of the natural environment 73

5.3 Common property resources, external costs and market failure 76

5.3.2 Environmental externalities and their economic consequences 78

5.5 The macroeconomic effects of environmental regulations: an overview 85

part five THE PERENNIAL DEBATES ON THE BIOPHYSICAL LIMITATIONS TO

6 Biophysical limits to economic growth: the Malthusian perspective 92

6.2 The simple Malthusian growth doctrine: population and resource scarcity 93

6.3 Modified Malthusian models: population, resource use and environmental quality 96

6.3.1 Population and its impact on resource utilization and environmental quality 97

vi

6.3.2 Per capita consumption and its influence on the Population-resource-environment

7 Biophysical limits to economic growth: the neoclassical economic perspective 108

7.3 The classical doctrine of increasing resource scarcity: the empirical evidence 111

7.4 Emerging resource scarcity or abundance: the recent evidence 114

7.5 Economic growth, the environment and population: the neoclassical perspective 117

8 Biophysical limits to economic growth: the ecological economics perspective 123

8.3 The development of ecological economics: a brief historical sketch 126

8.4 Biophysical limits and their implications for economic growth: an ecological

economic perspective

129

8.4.2 Nicholas Georgescu-Roegen (1906–94): energy as a limiting factor 130

vii

9.1 Introduction 143

9.2 Sustainable development: a helpful term or a vague and analytically empty concept? 144

9.5 The safe minimum standard (SMS) approach to sustainability 153

part six THE ECONOMICS OF ENVIRONMENTAL RESOURCES: PUBLIC

POLICIES AND COST-BENEFIT ESTIMATIONS OF ENVIRONMENTAL

10.4 Changes in preference and technology and their effects on the optimal level of

pollution

171

11 The economics of environmental regulations: regulating the environment

viii

11.5 Chapter summary 195

12 The economics of environmental regulations: pollution tax and markets for

12.4 An evaluation of the emission trading programs in the United States 209

12.4.1 Programs to phase out leaded gasoline and ozone-depleting chlorofluorocarbons

(CFCs)

209

13 Global environmental pollution: acid rain, ozone depletion and global

13.5 International responses to acid rain, ozone depletion and climate change 220

14 The economic theory and measurement of environmental damage (benefit):

14.3 Practical methods of measuring the benefits of environmental improvement 235

ix

14.3.2 The replacement cost approach 237

14.4 Some general problems associated with the economic approach to environmental

valuation

246

15 A framework for assessing the worthiness of an environmental project:

part seven BASIC ELEMENTS OF THE ECONOMIC THEORIES OF RENEWABLE AND

16.3 General characteristics of the natural growth function of fishery populations 272

16.4 The production function of fishery: a steady-state bioeconomic equilibrium model 274

16.5.2 The socially optimal level of effort under private property rights 281

x

16.7 Some important limitations of the steady-state bioeconomic model 286

17 Fundamental principles of the economics of nonrenewable resources 293

17.3 The optimal intertemporal allocation of nonrenewable resources 299

17.3.2 The general condition for optimal intertemporal allocation of nonrenewable and

nonrecyclable resources

300

17.3.3 The optimal intertemporal allocation of nonrenewable but recyclable resources 303

17.3.4 Further reflections on the nature of the user cost and some public policy

implications

304

17.4 The optimal price and extraction paths of nonrenewable resources 307

17.5 Resource prices and extraction rates in the less than perfect world 311

17.6 Resource exhaustion, backstop technology and limits to growth 313

part eight RESOURCE SCARCITY, POPULATION, POVERTY AND THE

18.3 Population control policy: in theory and practice 324

18.4 Economic development, population, poverty and environmental degradation 329

xii

5.2 Social optimum in the presence of externality: the case of the paper industry 81

10.2 Marginal pollution damage cost 167

10.5 Effect of technological and preference changes on the optimal level of pollution 172

10.7 A case where a zero level of waste emission is considered optimal 174

11.5 Emission standards and the incentive to improve pollution control technology 194

12.3 Effluent charge and a firm’s incentive to invest in a new pollution control technology 202

16.5a Long-run total revenue, total cost and fishing effort for a fishery 281

17.2 Possible geochemical distribution of abundant and scarce elements 298

17.3 Optimal intertemporal allocation of an abundant nonrenewable resource 300

17.4 Optimal intertemporal allocation of a nonrenewable and nonrecyclable resource 301

xiv

11.1 Some of the major environmental laws enacted by the United States Congress, 1938–

90

187

14.1 Total annual consumer surplus (US$) from recreation use and preservation value to

Colorado households from increments in wilderness designation, Colorado, 1980

246

18.1 Approximate time taken for the world’s population to grow by a billion 321

18.2 World population growth by decade 1950–90 with projections to 2000 323

18.3 Annual rates of population growth (as percentages) by regions, 1950–85 323

Case studies

9.1 Sustainable forest management practice: the case of the Menominee Indian

Reservation

151

9.2 Habitat preservation of endangered fish species in the Virgin River systems: an

application of the safe minimum standard approach

153

15.1 Economics and the Endangered Species Act: costs of species protection 259

7.1 Resources, population, environment: an oversupply of false bad news 110

9.1 What will happen to Saudi Arabia when its oil reserves are eventually exhausted? 148

The primary objective of this book is to present the economic and ecological principles essential for a clearunderstanding of the complex contemporary environmental and natural resource issues and policyconsiderations Several textbooks have been written on this subject in recent years One may ask, then, whatexactly differentiates this one from the others?

LEVEL

This book is written for an introductory-level course in environmental and resource economics It isprimarily designed for college sophomores and juniors who want to study environmental and resourceconcerns with an interdisciplinary focus The academic majors of these students could be in any field ofstudy, but the book would be especially appropriate for students with majors in economics, politicalscience, environmental studies or biological sciences

Several other textbooks may claim to have the above-stated features However, very few, if any, offer twochapters that are exclusively designed to provide students with fundamental economic concepts specificallyrelevant to environmental and resource economics In these chapters, economic concepts such as demandand supply analysis, willingness to pay, consumers’ and producers’ surplus, rent, marginal analysis, Paretooptimality, factor substitution and alternative economic measures of scarcity are thoroughly andsystematically explained The material in these two chapters (Chapters 2 and 3) is optional They are

intended to serve as a good review for economics students and a very valuable foundation for students with

a major in a field other than economics This book requires no more than a semester course in microeconomics.Thus, unlike many other textbooks in this field, it does not demand a knowledge of intermediate micro-economics, either implicitly or explicitly

The claim that environmental and resource economics should be studied within an interdisciplinary

context is taken very seriously Such a context requires students to have, in addition to microeconomics, a

good understanding of the basic principles of the natural and physical sciences that govern the natural world.This book addresses this concern by devoting a chapter to ecology This is done not only to make certainrelevant ecological principles understandable to non-science students, but also to clearly present thedisciplinary tie between economics and ecology This chapter assumes no prior knowledge in ecology.Instead, it discusses thoroughly and systematically ecological concepts such as ecosystem, ecosystemstructure, material recycling, the law of matter and energy, entropy, and the interrelationships of succession,stability, resilience and complexity of ecological systems These are concepts especially pertinent to theunderstanding of biophysical limits and to recent concerns with global issues such as loss of biodiversityand climate change

This book is primarily a theoretical exposé of environmental and resource economics The emphasis is on

a systematic development of theoretical principles and conceptual frameworks essential for a clearunderstanding and analysis of environmental and resource issues To catch students’ imagination andattention, as well as to reinforce understandings of basic theoretical principles, case studies and “exhibits”are incorporated into most of the chapters These are taken from newspaper clippings, brief magazinearticles, articles and summaries of empirical studies from professional journals, and excerpts of publicationsfrom government and private research institutions

ORIENTATION

Unlike other textbooks in this area, this book is written in the belief that a course in environmental andresource economics cannot be treated as just another applied course in economics It must include botheconomic and ecological perspectives and, in so doing, must seek a broader context within which

environmental and natural resource issues can be understood and evaluated In this regard, the book does not

approach environmental and natural resource problems from only or even predominantly a standard economicperspective

From my experience of nearly two decades of teaching a course in environmental and resourceeconomics, I have come to realize that it is extremely difficult for students to understand and appreciate thesubtle differences between the economic and ecological perspectives until they are made aware of the

“axiomatic” foundations (the conceptual starting point of analysis) of each of these perspectives With this

in mind, this book starts with a careful examination of the preanalytic or axiomatic assumptions of standardeconomic perspectives concerning resources, resource scarcity and the role that natural resources play in theeconomic process Similarly, the axiomatic assumptions pertaining to the ecological perspective are

discussed in another chapter Thus, the clear delineation of the anthropocentric and biocentric views of

natural resources and their scarcity is a unique feature of this textbook

Most texts on environmental and resource economics are neoclassical in their orientation For this reason

the emphasis is mainly on intertemporal optimal allocation among alternative uses of the total resource flow, including the services of the natural environment In this regard the overriding concern is efficiency.

This book does not disregard the importance of this approach, but it adds to it another important dimension:

the concern for achieving the optimal scale of total resource flow relative to the environment The key issue

here is to keep the economic scale within the ecological carrying capacity and this requires the recognition

of biophysical limits Several chapters are assigned to discuss alternative views on biophysical limits to

economic growth and the economics of sustainable development This, as will be evident shortly, is one ofthe most distinguishing features of this book

xix

The book consists of eighteen chapters which are grouped into eight parts, as shown in the diagram Thefive boxes represent the major organizational themes of the book As indicated by the direction of thearrows, these five themes or major groupings are related in both specific and general terms The exactnature of these relationships will become evident from the discussions that follow

Fundamental economic and ecological concepts and perspectives

The four chapters of Parts One, Two and Three constitute what I consider to be the conceptual starting point

of economic and ecological analyses of natural resources and their scarcity Chapter 1 deals with the

“axiomatic” assumptions that are fundamental to the understanding of the standard economic perception ofnatural resources and their role in the economic process An early explanation of these assumptions, even if

it does not serve to correct logical errors, helps clarify the position neoclassical economists tend to have onnatural resource issues in general

Chapters 2 and 3 offer comprehensive treatment of all the basic concepts essential for understanding theeconomic approach to natural resource and environmental policy Furthermore, for the most part this is doneusing no more than the traditional demand and supply analysis The two chapters are written with three specificobjectives in mind:

1 To show how, in general, resources are allocated in a competitive market economy

2 To identify and carefully assess the relative merits of several alternative indicators of emerging naturalresource scarcity

3 To explain the economic arguments on how scarcity of natural resources can be alleviated throughfactor substitution possibilities and/or technological advances As stated earlier, these two chapters areoptional for students with a strong economic background

xx

Chapter 4 is intended to provide students with basic concepts and principles of ecology, therebyencouraging economics students to venture beyond the realm of their discipline The position taken here isthat no serious student of environmental and resource economics can afford to be ignorant of the importantlessons of ecology However, it should be understood that the inquiry on this subject matter is quite focusedand limited The primary intent is to familiarize students with carefully selected ecological concepts andprinciples so that they will acquire at the end, if not appreciation, a clear understanding of ecologists’perspective of the natural world and its relationship with the human economy This is also a chapter of vital

importance to the recognition of the existence of biophysical limits.

Environmental externalities and market failure

Part Four, which consists of a single chapter, Chapter 5, represents the second organizational theme of thetext This part covers fundamental concepts in environmental economics It demonstrates how the basicconcepts in ecology and economics studied in Parts One, Two and Three can be used to help us understandand resolve the problem of environmental pollution Concepts such as the waste absorptive capacity of theenvironment, externalities, market failures and environmental regulations and their macroeconomic effectsare discussed in this chapter These are also concepts which are important to understand for the discussion

in Part Five

Biophysical limits to economic growth

The four chapters in Part Five are unique in their organization and contain some topics that are rarelydiscussed in standard textbooks on environmental and resource economics The major concern here is the

scale of the economy relative to the natural environment

Chapters 6 7 and 8 discuss the limit to economic growth from three distinctive perspectives: Malthusian,neoclassical and ecological economics, respectively Chapter 9 deals with the economics of sustainabledevelopment The key questions that these four chapters address are:

1 Can we expect unlimited economic growth in a world endowed with finite resources?

2 If ecological limits are important factors in determining future trends of economic growth, what steps

or precautions should be taken in order to avoid transgressing these natural limits?

The economics of environmental and natural resources management

The unifying feature of Parts Six and Seven (which consist of Chapters 10–17) is the fact that they deal withenvironmental and resource economic issues from a predominantly neoclassical perspective The emphasis

in these chapters is on “getting the prices right.” That is, environmental resources are optimally allocatedprovided market prices reflect their “true” scarcity values

Chapters 10–15, the economics of environmental resources, deal with the standard economic approaches

to environmental policies and valuations Chapter 10 develops theoretical models that can be used as apolicy guide to control environmental pollution In Chapters 11 and 12, a number of pollution control policyinstruments are thoroughly discussed and analyzed The scientific, economic and public policy issues ofenvironmental pollution that have a global dimension are discussed in Chapter 13 Chapter 14 examinesalternative economic approaches to measuring environmental benefits (damage) Chapter 15 deals witheconomic valuation of environmental projects using a cost-benefit analysis framework

xxi

Chapters 16 and 17 explore the fundamental principles of the economics of renewable and nonrenewableresources Individually, Chapter 16 covers the basic economic theory of renewable resources as it is applied

to biological resources and to fishery in particular Chapter 17 deals with the basic elements of theeconomic theory of nonrenewable resources

An important point to emphasize here is that even though the seven chapters in Parts Six and Seven are

predominantly neoclassical in their orientation, this should not suggest the total abandonment of the ecological theme that is central to this text As much as possible, the major conclusions drawn from eachchapter are subjected to critical appraisal on the basis of their conformity or lack thereof to relevantecological principles

Population, economic development and environmental degradation

Part Eight, which is composed of a single chapter, Chapter 18, analyzes the contemporary population,resources and environmental problems of the developing nations The main concerns are poverty and rapidenvironmental degradation on a global scale In addressing these issues, the concern is not only efficiency

but also the scale of the global economy relative to the environment In this respect, the issues discussed in

this chapter have the added feature of integrating the concepts learned in both Part Five (where scale is theemphasis) and Parts Six and Seven (where efficiency is the emphasis)

xxii

The experience of being the sole author of a textbook on a subject which requires an interdisciplinary focushas indeed been daunting Undoubtedly, the completion of this project would not have been possible withoutthe help and encouragement of many professional associates, students and family members In this sense, Icannot truly claim to be the sole author of this text

I am deeply indebted to Fumie, my wife, and Christine R.Fahndrich, my student, who read and edited thefirst draft Nothing written in this text passed to other readers without first being read by my wife

I would like to thank several individuals for their specific and significant contributions to this text Thesepeople include the following: Marvin Soroos for authoring Chapter 13 (the chapter on global environmentalpollution); Paul Olexia for his close reading and for his concrete and insightful suggestions on how toimprove the material covered in Chapter 4 (the chapter on ecology); Mike Travis for his very carefulreading of Chapter 16 (the chapter on renewable resources); Glen Britton for his contribution to

Case Study 9.1 and for suggesting alternative approaches and valuable literature bearing on the subject; andMike Bernasek for reading and commenting on Part Five (Chapters 6 9), and, most importantly, for hisencouragement

I would like also to express my deeply felt gratitude to my colleagues from the Economics Department,Kenneth Reinert, Charles Stull, James Stansell and Phil Thomas, for reading parts of the text and for theirhelpful comments and suggestions

This book uses numerous quoted remarks, exhibits and case studies These works are not included formere appearance or style; they significantly contribute to the effectiveness of the book in conveying certainimportant ideas Obviously, my debt to those whose work I have quoted and summarized is immeasurable.However, I have the sole responsibility for the interpretation placed on these works

I actually started writing this book three years ago However, the idea of writing a textbook onenvironmental and resource economics had been on my mind for much of the eighteen years that I havebeen actively engaged in teaching courses in this subject This enduring desire to write a text would nothave been possible without the positive stimulus and, in some instances, tangible support that I have beenfortunate to receive from my students In this regard, I am deeply indebted to all those who have takencourses from me dealing with topics on environmental and resource issues

A special word of thanks to my editor, Alison Kirk, for her thoughtful, professional and supportive role inthe early development of this textbook Special thanks too to Andreja Zivkovic for his effective editorialguidance and assistance during the time Alison Kirk was on leave Many thanks also to Goober Fox for hiscooperative spirit and for his many helpful contributions as desk editor I would also like to express mysincere appreciation of the valuable comments I received from several anonymous reviewers during thevarious stages of the text development I am especially indebted to the last group of four anonymous

reviewers for their close reading of the entire manuscript and for providing me with concrete ideas andsuggestions as to how the book could be improved.

Finally, I would like to express my sincere gratitude to my two daughters Sophia and Aida, for theircontributions to proofreading and editing Most of all, it would have been extremely difficult to completethis project without their constant cheering and encouragement I am also forever indebted to Fumie, mywife, for the continued support, love and unconditional commitment she has shown to me and to our twodaughters I dedicate this book to her and to the mother of all mothers, the planet EARTH

xxiv

Introduction: Overview of Environmental and Resource

Economics as a Subdiscipline in Economics

Labor is the father and nature is the mother of wealth.

(Petty 1899:2:377)

THE CONCEPT OF NATURAL RESOURCES

The study of natural resources, the subject matter of this book, involves theories and concepts that seem to

be continually evolving with the passage of time and with our improved understanding of the naturalcircumstances that govern these resources For example, the preclassical or Physiocratic school (1756–78)

and classical economists (1776–1890) typically used land as a generic term to describe natural resources To

these economists, land or natural resources represented one of the three major categories of basic resourcesessential to the production of goods and services—the other two being labor and capital

This three-way classification of basic resources or factors of production seems to persist, although ourunderstanding of natural resources and their roles in the economic process has changed markedly Advances

in the natural and physical sciences have increased our knowledge of the laws that govern the natural world.Furthermore, as the human economy continues to expand, its impacts on the natural world have becomesizable and potentially detrimental Inevitably our conception of natural resources tends to be influenced byour current understanding of the human economy and its interrelationship with the natural world

Broadly defined, natural resources include all the “original” elements that comprise the Earth’s naturalendowments or the life-support systems: air, water, the Earth’s crust and radiation from the sun Somerepresentative examples of natural resources are arable land, wilderness areas, mineral fuels and nonfuelminerals, watersheds, and the ability of the natural environment to degrade waste and absorb ultraviolet lightfrom the sun

Natural resources are generally grouped into two major categories: renewable and nonrenewable naturalresources Renewable resources are those resources that are capable of regenerating themselves within arelatively short period, provided the environment in which they are nurtured is not unduly disturbed Examplesinclude plants, fish, forests, soil, solar radiation, wind, tides and so on These renewable resources can befurther classified into two distinct groups: biological resources and flow resources

Biological resources consist of the various species of plants and animals They have one distinctivefeature that is important for consideration here While these resources are capable of self-regeneration, theycan be irreparably damaged if they are exploited beyond a certain critical threshold Hence, their use should

be limited to a certain critical zone As will be explained later, both the regenerative capacity of these

resources and the critical zone are governed by natural biological processes Examples of this type ofresource are fisheries, forests, livestock, and all forms of plants.

Flow resources include solar radiation, wind, tides and water streams Continuous renewal of theseresources is largely dictated by atmospheric and hydraulic circulation, along with the flow of solarradiation Although these resources can be harnessed for specific use (such as energy from solar radiation orwaterfalls), the rate at which the flows of these potential resources are regulated is largely governed bynature This does not, however, mean that humans are totally incapable of either augmenting or decreasingthe amount of flow of these resources A good illustration of this would be the effect greenhouse gasemissions (in particular carbon dioxide emissions) have on global warming

Nonrenewable resources are resources that either exist in fixed supply or are renewable only on ageological timescale, whose regenerative capacity can be assumed to be zero for all practical purposes.Examples of these resources include metallic minerals like iron, aluminum, copper and uranium; andnonmetallic minerals like fossil fuels, clay, sand, salt and phosphates

Nonrenewable resources can be classified into two broad categories The first group includes thoseresources which are recyclable, such as metallic minerals The second group consists of nonrecyclableresources, such as fossil fuels

As indicated by the title of this introductory section, mainly for pedagogical purposes the study of natural

resources is subdivided into two major subfields: environmental economics and resource economics The

difference between these two subfields is primarily a matter of focus In environmental economics theprimary focus is on how to use or manage the natural environment (air, water, landmass) as a valuableresource for the disposal of waste The material in Chapter 5 and Chapters 10–15 covers concepts and issuesspecifically related to environmental economics In natural resource economics the emphasis is on theintertemporal allocation of extractive nonrenewable resources (such as petroleum, iron ore, potash, etc.) andthe harvest of renewable resources (such as fish, forest products, and other plant and animal varieties).These are the subject matter of Chapters 16 and 17

THE ECONOMY AND THE NATURAL ENVIRONMENT: AN EMERGING

PARADIGM

The new understanding in environmental and resource economics is that the natural environment and thehuman economy are two interrelated systems They are interrelated in the sense that a change in one couldhave significant effect(s) on the function of the other This is because the human economy has grown to a

size that can no longer be considered negligible relative to the natural world Hence, consideration of scale

(the size of the economy relative to the natural world) is, although still neglected, a significant issue thatneeds to be addressed in environmental and resource economics

As shown in the diagram, in specific terms the economy is assumed to depend on the natural environmentfor three distinctive purposes: (a) the extraction of nonrenewable resources and the harvest of renewableresources to be used in the production process; (b) the disposal and assimilation of wastes; and (c) theconsumption of environmental amenities What this suggests is that the economy cannot be viewed as an

open system Its continued functioning depends on resources that trace their origin and existence to thenatural phenomena or the processes that occur in nature, as will become evident from Chapter 4

Thus, broadly viewed, the economy is assumed to be completely dependent on the natural environmentfor raw materials, amenities and the disposal of waste materials Furthermore, the capacity of theenvironment to carry out the above economic functions cannot be considered limitless As with any otherbranch of economics, fundamental to the study of environmental and resource economics is the problem ofxxvi

scarcity—or, more specifically, biophysical scarcity The implication of this for economic growth is asubject matter thoroughly discussed in Chapters 6 9.

ENVIRONMENTAL AND RESOURCE ECONOMICS: SCOPE AND NATURE

As a subdiscipline of economics, environmental and resource economics started in the 1960s—the early years

of the so-called environmental movement However, despite its brief history, over the past three decades ithas become one of the fastest-growing fields of study in economics The growing popularity of this field ofinquiry parallels the increasing awareness of the interconnectedness between the economy and theenvironment— more specifically, the increasing recognition of the significant roles that nature plays in theeconomic process as well as in the formation of economic value

The nature and scope of the issues addressed in environmental and resource economics are quite variedand all-encompassing Below is a list of some of the major general topics addressed in this field of study.The list is also representative of the issues addressed in this book

• the call for a renewed perception and understanding of resource scarcity;

• the need to reestablish the disciplinary ties between ecology and economics;

• the causes of environmental degradation;

• the difficulties associated with assigning ownership rights to environmental resources;

• the trade-off between environmental degradation and economic goods and services;

• assessing the monetary value of environmental damage;

• the ineffectiveness of the market, if left alone, in allocating environmental resources;

• the difficulties associated with measuring the size of resource stocks of biological and geological origin;

• economic indicators of natural resource scarcity and their limitations;

• public policy instruments that can be used to slow, halt and reverse the deterioration of environmentalresources and/or the overexploitation of renewable and nonrenewable resources;

Schematic view of the interrelationship between the natural environment and the economy

xxvii

• the macroeconomic effects of environmental regulations and other resource conservation policies;

• the extent to which technology can be used as a means of ameliorating resource scarcity—that is, limits

to technology;

• the extent to which past experience can be used to predict future events that are characterized byconsiderable economic, technological and ecological uncertainties;

• population problems: past, present and future;

• the interrelationships among population, poverty and environmental degradation in the developingcountries of the world;

• resource problems that transcend national boundaries, and thus require international cooperation for theirresolution;

• the limits to economic growth;

• ethical and moral imperatives for resource conservation—concerns for the welfare of future generations;

• the necessity and viability of sustainable development

This list by no means exhausts the issues that can be addressed in environmental and resource economics.However, the issues contained in this list do provide important clues concerning some of the fundamentalways in which the study of environmental and resource economics is different from other subdisciplines ineconomics

First, the ultimate limits to resource availability are imposed by nature That is, their origin, interactionsand reproductive capacity are largely governed by nature

Second, most of these resources have no readily available markets: for example, clean air, ozone, thegenetic pool of a species, the price of petroleum fifty years from now, etc

Third, time plays a very important role in the allocation and distribution of these resources The major

problem is generally recognized as “How long and under what conditions can human life continue on earth

with finite stocks of in situ resources, renewable but destructible resource populations, and limited

environmental systems?” (Howe 1979:3) No serious study in environmental and resource economics can beentirely static

Fourth, no serious environmental and resource economic study can be entirely descriptive Normative

issues such as intergenerational fairness and distribution of resources between the poor and rich nations arevery important

Fifth, uncertainties are unavoidable considerations in any serious study of environmental and naturalresource issues These uncertainties may take several forms, such as prices, resource stock size, irreversibleenvironmental damage, or unexpected and sudden resource depletion

Such is the nature of the subject matter that we are about to begin exploring in this book

REFERENCES

Howe, C.W (1979) Natural Resource Economics, New York: John Wiley.

Petty, W (1899) The Economic Writings of Sir William Petty, ed C.H.Hull, Cambridge.

xxviii

Standard economic visions of natural resources, and the roles they play in the attainment of human material needs, are generally at odds with those of most physical scientists, and most notably with those of ecologists Part One , which comprises a single chapter, Chapter 1 , examines the basic physical and institutional elements that are fundamental to the understanding of the standard economic perception of natural resources and their role in the economic process This chapter reveals what could be considered the mainstream economists' ªpreanalyticº vision of the economy and its relationship with the natural world What can be observed from the discussion in this chapter is the treatment of the natural environment as one of the many ªfungibleº assets that can be used to satisfy human needs In this regard, the emphasis is on the general problems of resource scarcity This being the case, the roles of consumers' preferences, efficiency, markets and technology are stressed.

This view is contrasted in Part Three with the ecological perspective on the natural environment as

it relates to human economy.

After reading this chapter you will be familiar with the following:

• the traditional economic classification of basic resources;

• the “anthropocentric” tendencies of the standard economic notions of natural resources;

• fungibility of resources;

• resource scarcity, opportunity cost and efficiency;

• the rudiments of a market economy and its basic constituents;

• the production possibility frontier;

• the difference between efficiency and optimality;

• flow versus stock concepts of resources;

• the neoclassical economic perspective of the human economy and the extent to which it depends

on the natural world

Before any element can be classified as a resource, two basic preconditions must be satisfied: first, theknowledge and technical skills must exist to allow its extraction and utilization; and second, theremust be a demand for the materials or services produced If either of these conditions is not satisfied

then the physical substances remain neutral stuff It is, therefore, human ability and need which create

resource value, not merely physical presence

(Rees 1985:11)

1.1 INTRODUCTION

The primary objective of this chapter is to establish a clear understanding of the axiomatic, or preanalytic,conceptions of mainstream economics concerning natural resources and their role in the economic process.This is a crucial first step in identifying the ideological basis of neoclassical environmental and resourceeconomics In general, the phrase “neoclassical economics” refers to what has been regarded as thedominant (or the “normal,” in the Kuhnian sense) approach to economic analyses since about the 1870s

Sections 1.2–1.4 provide overviews of the concept of resources in general and the role of socialinstitutions in coordinating economic activities These issues are addressed from a purely neoclassicaleconomic perspective In Sections 1.5 and 1.6 the focus shifts to exploring the broader implications of thisparticular worldview of resources, using Costa Rica as a case study.

1.2 THE CONCEPT OF RESOURCES

In broad terms, a resource can be defined as anything that is directly or indirectly capable of satisfyinghuman wants Traditionally, economists classify resources into three broad categories: labor, capital and

natural resources Labor encompasses the productive capacity of human physical and/or mental efforts

measured in terms of ability to do work or produce goods and services Examples are a worker on an auto

assembly line, a high-school teacher and a commercial truck driver Capital refers to a class of resources

that is produced for the purpose of creating a more efficient production process In other words, it is thestock of produced items available not for direct consumption, but for further production purposes Examples

include machines, buildings, computers and education (acquired skill) Natural resources are the stock of

living and nonliving materials found in the physical environment, and which have an identifiable potentialuse to human beings (Randall 1987) Agricultural land, deposits of ferrous and nonferrous minerals, water,fisheries, and wilderness and its multiple products are examples of natural resources

At this point, four key issues need to be clarified regarding this economic notion of resources First, it is

rare that basic resources (labor, capital and natural resources) are used for direct consumption without some

modification Resources are often used as factors of production or as means to produce final goods and

services that are capable of directly satisfying human needs In other words, basic resources are oftenviewed as a means to an end, rather than ends in themselves The second and somewhat related issue is that,

as the quotation at the beginning of the chapter clearly indicates, the economic notion of resources is strictly

anthropocentric That is, the economic value of any resource is defined by human needs and nothing else—

which implies that resources have no intrinsic value (value which depends solely on the nature of the thing

in question) (Attfield 1998) Case Study 1.1 illustrates the anthropocentric view of resources Theworthiness of a watershed service (water purification process by root systems and soil microorganisms) isidentified solely by its commercial value The fact that the watershed under consideration may have other,noneconomic value is not considered

The third issue that needs to be understood is that each of the above resource categories is of economic concern to the extent that they are scarce found in limited quantities and/or qualities The fourth issue deals

with the fact that as factors of production, resources are used in combinations Furthermore, resources are

generally considered to be fungible (Solow 1993) That is, one kind of resource (such as a machine) can be

freely replaced by another (such as labor) in the production process; or one type of energy resource (such aspetroleum) can be replaced by another form of energy (such as natural gas) This is also evident in

Case Study 1.1 where it is suggested that water purification for the city of New York can be undertaken either

by investing in the preservation of “natural capital” (a forest watershed) or by building a filtration plant—physical capital Fungibility implies that no particular resource is considered to be absolutely essential forproduction of goods and services (more on this in Chapters 3 and 7) However, as will be evident from thediscussion in the next section, fungibility does not in any way suggest an escape from the general problem ofresource scarcity

RESOURCES AND RESOURCE SCARCITY 3

CASE STUDY 1.1

ECONOMIC RETURNS FROM THE BIOSPHERE

Garciela Chichilnisky and Geoffrey Heal

…The environment’s services are, without a doubt, valuable The air we breathe, the water we drink and the food we eat are all available only because of services provided by the environment How can we transform these values into income while conserving resources?

We have to “securitize” (sell shares in the return from) “natural capital” and environmental goods and services, and enroll market forces in their conservation This means assigning to corporations—possibly by public-private corporate partnerships—the obligation to manage and conserve natural capital in exchange for the right to the benefits from selling the services provided.

In 1996, New York City invested between $1 billion and $1.5 billion in natural capital, in the expectation of producing cost savings of $6 billion-$8 billion over ten years, giving an internal rate of return of 90–170 percent in a payback period of four to seven years This return is an order of magnitude higher than is usually available, particularly on relative risk-free investments How did this come about?

New York’s water comes from a watershed in the Catskill Mountains Until recently, water purification processes by root systems and soil microorganisms, together with filtration and sedimentation during its flow through the soil, were sufficient to cleanse the water to the standards required by the US Environmental Protection Agency (EPA) But sewage fertilizer and pesticides in the soil reduced the efficacy of this process to the point where New York’s water no longer met EPA standards The city was faced with the choice of restoring the integrity of the Catskill ecosystems or of

building a filtration plant at a capital cost of $6 billion-$8 billion, plus running costs of the order of $300 million annually In other words, New York had to invest in natural capital or in physical capital Which was more attractive?

Investing in natural capital in this case meant buying land in and around the watershed so that its use could

be restricted, and subsidizing the construction of better sewage treatment plants The total cost of restoring the watershed is expected to be $1 billion–$1.5billion…

To address its water problem New York City has floated an “environmental bond issue,” and will use the proceeds to restore the functioning of the watershed ecosystems responsible for water purification The cost of the bond issue will be met by the savings produced: avoidance of a capital investment of $6 billion–$8 billion, plus the $300 million annual running costs of the plant The money that would otherwise have paid for these costs will pay the interest on the bonds New York City could have “securitized” these savings by opening a

“watershed saving account” into which it paid a fraction of the costs avoided by not having to build and run a filtration plant This account would then pay investors for the use of their capital.

Source: Nature Vol 391, February 12,1998, pp 629–630 Reprinted by permission.

1.3 SCARCITY AND ITS ECONOMIC IMPLICATIONS

At the root of any economic study is the issue of resource scarcity In fact, as a discipline, economics isdefined as the branch of social science that deals with the allocation of scarce resources among competingends What exactly do economists mean by resource scarcity? What are the broader implications ofscarcity?

For economists, scarcity is the universal economic problem Every human society, whether a tribalsociety such as the Aborigines in Australia or an economically and technologically advanced society such

4 THE “PREANALYTIC” VISION

as Japan, is confronted with the basic problem of scarcity That is, at any point in time, given societalresource endowments and technological know-how, the total sum of what people want to have (in terms ofgoods and services) is far greater than what they can have (Kohler 1986).

Considering that human wants for goods and services are immense and, worse yet, insatiable in a world

of scarcity, what can be done to maximize the set of goods and services that people of a given society can

have at a point in time? This question clearly suggests that the significant economic problem involves

rationing limited resources to satisfy human wants and, accordingly, has the following four generalimplications:

1 Choice The most obvious implication of scarcity is the need to choose That is, in a world of scarcity,

we cannot attain the satisfaction of all our material needs completely Hence, we need to make choicesand set priorities

2 Opportunity cost Every choice we make has a cost associated with it; one cannot get more of something

without giving up something else In other words, an economic choice always entails sacrifice oropportunity cost—the highest-valued alternative that must be sacrificed to attain something or satisfy awant In a world of scarcity, “there is no such thing as a free lunch.”

3 Efficiency In the presence of scarcity, no individual or society can afford to be wasteful or inefficient The

objective is, therefore, to maximize the desired goods and services that can be obtained from a given

set of resources This state of affairs is attained when resources are fully utilized (full employment) and used for what they are best suited in terms of production (i.e., there is no misallocation of resources).

Furthermore, efficiency implies that the best available technology is being used (McConnell and Bruce1996)

4 Social institutions As noted earlier, the essence of scarcity lies in the fact that people’s desire for goods

and services exceeds society’s ability to produce them at a point in time In the presence of scarcity,

therefore, the allocation and distribution of resources always cause conflicts To resolve these conflicts

in a systematic fashion, some kind of institutional mechanism(s) needs to be established For example,

in many parts of the contemporary world, the market system is used as the primary means of rationing

scarce resources How this system operates conceptually is briefly discussed in the next section

1.4

A SCHEMATIC VIEW OF THE ECONOMIC PROCESS

In this section, using a circular flow diagram (an approach familiar to anyone who has taken a course inintroductory economics) an attempt will be made to specify the institutional components that are basic to a

market economy As a working definition, an economy can be viewed as a rather complex institutional

mechanism designed to facilitate the production, consumption and exchange of goods and services, givenresource scarcity and technology, the preferences of households, and the legal system for resourceownership rights (Randall 1987) All economies are alike in the sense that they are devised to help facilitatethe production, consumption and exchange of goods and services, and they are constrained by resourcescarcity and technology On the other hand, economies differ in the degree of empowerment given tohouseholds and firms in their ability to make economic choices, and the legal view of property ownershiprights For example, in a capitalistic and market-oriented economy, freedom of choice and privateownership of property are strongly held institutional principles In contrast, in a centrally planned economy,the production and distribution of goods are dictated by bureaucratic choices, with resource ownershipretained by the state

RESOURCES AND RESOURCE SCARCITY 5

The circular flow diagram in Figure 1.1 is designed to show that the operation of a market-orientedeconomy is composed of the following elements:

1 Economic entities (households and firms) Households are the final users of goods and services and the

owners of resources In a market economy, given resource scarcity the primary goal is to find effectiveways to address the material needs of consumers (households) At least in principle, consumers’ well-being is the primary goal of a market-oriented economy Although households are final users of goodsand services, firms enter the economic process as transformers of basic resources (labor, capital and

natural resources) into goods and services, and this is done on the basis of consumers’ preferences (demand)

2 Markets Markets represent an institutional arena in which exchanges (buying and selling) of final

goods and services and factors of production (labor, capital and natural resources) take place.Traditionally, economists group markets into two broad categories, namely product and factor markets

The product market is where the exchange of final goods and services occurs In this market, demand and supply provide information about households and firms, respectively The factor market refers

exclusively to the buying and selling of basic resources, such as labor, capital and natural resources Inthis submarket, demand imparts market information about firms and supply provides information abouthouseholds That is, households are the suppliers of labor, capital and natural resources, while firms arethe buyers, and in turn use these items to produce final goods and services for the product market.Clearly, then, the roles played in the factor market by households and firms respectively are the reverse

of their roles in the product market

In both the product and the factor markets, information about resource scarcity is transmitted throughprices These prices are formed through the interactions of market demand and supply; and, undercertain conditions, market prices can be used as reliable indicators of both present and future resourcescarcities (a subject to be discussed in Chapters 2 and 3) Furthermore, using prices from the productmarket, economists customarily measure aggregate economic performance of a given economy or a

country by the total market value of all the goods and services produced for final use within a given

period, usually a year This is called gross domestic product (GDP) when the total market value of thefinal goods and services produced is attributable to factors of production (labor, capital and naturalresources) originating exclusively from a given country (more on this in the next section)

3 Nonmarket public and private institutions A market does not function in a vacuum; that is, for a market

to operate efficiently, ownership rights need to be clearly defined and enforced This requires theestablishment of public agencies designed to articulate and enforce the rules and regulations by whichownership rights are attained, relinquished (transferred) and enforced (more on this in Chapters 2 and

5) In addition, competition in the marketplace is fostered through public intervention in someinstances The public and private entities (social institutions) that legislate the rules for assigningresource ownership rights and regulate the degree of competition in the marketplace are represented bythe box at the center of Figure 1.1 On one view, what flows from this box to households, firms andmarkets is not physical goods but information services In general, the main function of these flows ofinformation is to ensure that economic agents (households and firms) are playing by some socially

predetermined rules of the game In this regard, ideally, social institutions are perceived as being rather

like a conductor of a symphony orchestra or a traffic director at a busy intersection

Viewed this way, social institutions have important economic functions However, they should not

be assumed to be either perfect or costless (North 1995) When they are not functioning well, the

6 THE “PREANALYTIC” VISION

information communicated through them can distort market signals (prices) and in so doing,significantly affect the allocation of scarce resources This will become evident in Chapters 2 and 5.The discussions so far have dealt with (a) the general concept of resources and their broad classification; (b)resource scarcity and its socioeconomic implications (choice, opportunity cost, efficiency and socialinstitutions); and (c) a schematic view of the basic institutional components of a market economy It isimportant to note that these are from a purely neoclassical economic perspective The next section attempts

to explore the implications of this type of “worldview” for resource concerns and focuses on naturalresources—the subject matter of this book Costa Rica is used as a case study, a nation whose recent efforts

to “preserve” its vital natural resources have been considerable (see Exhibit 1.1) This exhibit, along withthe discussions in the next section, further illustrates the anthropocentric tendencies of the standardeconomic notions of natural resources, and resources in general

EXHIBIT 1.1

ECOTOURISM, FORESTLAND PRESERVATION AND THE ECONOMY OF COSTA RICA

Costa Rica, a small nation with a primarily agrarian economy, is well known for its wilderness preserves About 35 percent of the country’s total land area is covered with vast tracts of virgin tropical forests Much of this forestland supports a variety of trees, including rich stands of ebony, balsa, mahogany, and cedar—which all have significant commercial value The animal population includes puma, jaguar, deer and monkeys Furthermore, Costa Rica’s forest is an important repository of many plants and biological species with significant ecological, if not economic, values It is reported that Costa Rica’s forest ecosystem houses literally thousands of species of plants and animals It is also important to note that the forestland contains the

Figure 1.1 Circular flow diagram of the economic process

RESOURCES AND RESOURCE SCARCITY 7

watersheds that constantly replenish the many river tributaries essential for providing one of the most critical energy resources of Costa Rica: waterpower.

The forest with its multiple products is important to the Costa Rican economy for more than its obvious

commercial values, and in recent years has been increasingly used for a specific type of service: ecotourism.

This entails preservation of a forest ecosystem to attract tourists interested in having direct experience of or contact with nature This development, among others, requires a significantly different use of Costa Rica’s natural resources— preserving forestland for its service value rather than the expansion of agricultural and cattle-ranching activities In recent years, Costa Rica has been regarded as the Mecca of ecotourism; and it is a major contributor to Costa Rica’s fast-growing service sector Currently, the service sector accounts for 58 percent of Costa Rica’s GDP (World Resources Institute 1998), and between 1985 and 1995, Costa Rica’s economy has grown at a healthy average annual rate of 4.5 percent.

Ecotourism is a relatively recent industry in Costa Rica The recent push to ecotourism emerged in large part from Costa Rica’s unsettling experience with deforestation in the previous two decades More specifically, during the 1970s and the early 1980s, Costa Rica attempted to increase its economic diversity through an emphasis on livestock production This economic pursuit accelerated the rate of deforestation (Meyer 1993) This trend has been contained, at least for now, and the switch from an emphasis on cattle ranching to ecotourism can justifiably be considered a success In this regard, Costa Rica seems to have a new industry with the potential to create an economy consistent with sustainable use of the country’s most important natural assets: the forestland and its multiple products.

1.5 APPLYING THE CONCEPT: ECOTOURISM, CATTLE RANCHING AND THE

ECONOMY OF COSTA RICA

Figure 1.2 is a graphical depiction of a production possibility frontier (PPF) It shows all the combinations ofecotourism services and cattle-ranching activities a society (in this case Costa Rica) can produce, givenresource scarcity, using the existing technology of production in both the ecotourism and the cattle-ranchingsectors of the economy For example, Costa Rica can produce amount E3 of ecotourism service if it chooses

to use all its available resources to specialize in the production of this service and nothing else Ecotourismservice may entail conserving forestland for purposes such as bird-watching, nature appreciation andaesthetic enjoyment, preserving animal and plant species for biological prospecting, game reserves, and so

on Evidently, ecotourism is a natural resource-intensive industry, and its use as an example in this chapter

is prompted by this factor alone

Similarly, R3 is the level of cattle-ranching activity that will be taking place if, at a point in time, allCosta Rica’s available resources are used exclusively for this purpose These are, of course, two extremecases The most likely scenario is represented by a mix of both economic activities Using its availableresources Costa Rica may choose to produce amounts E1 and R2 of ecotourism and ranching activities,respectively

What can we learn about choice, opportunity cost and efficiency using the notion of the PPF? First, at agiven point in time, we can view the production possibility curve as representing the boundary line betweenthe feasible and infeasible product choices of a society For example, in Figure 1.2, product (ecotourismservice and cattle) combinations outside the PPF, such as M, are unattainable On the other hand, thefeasible choices represent all the product combinations inside the PPF, such as N, and all the points along the

PPF curve In this sense, although resources are scarce, society is still confronted with an infinite number

of feasible choices. However, from a strictly economic viewpoint, there is a significant difference betweenoutput choices lying inside the PPF curve and those that are located on the PPF curve All product

8 THE “PREANALYTIC” VISION

combinations inside the PPF curve are regarded as inefficient For example, point N is regarded as

inefficient because Costa Rica could instead, by using the same amount of resources, have producedecotourism services and cattle output combinations indicated by points A, B and C on the PPF In so doing,Costa Rica would have been able to produce more of either the ecotourism service or cattle output (point C

or A), or more of both products, as indicated by point B

All output combinations along the PPF curve are regarded as efficient because, by definition, each point

represents a full utilization (full employment) of all the available scarce resources at a point in time Thus,there is no waste or idle resources Society is still, however, confronted with an infinite number of choices,

and any choice along the production possibility curve entails an opportunity cost For example, in

Figure 1.2, a move from A to C implies that to increase ecotourism service from E1 to E2 Costa Rica has toreduce (sacrifice) its output of cattle from R2 to R1 Thus, unless the country is using its scarce resourcesinefficiently (such as at point N), economic choices always entail costs in terms of alternative opportunitiesforgone

Furthermore, given the normal curvature of the PPF as presented in Figure 1.2, opportunity cost increases

as more and more scarce resources are devoted to further production of a specific product. For example, ifecotourism service is further increased from E2 to E3, the opportunity cost of doing this would suggest adrop of cattle production from R1 to zero Clearly, this cost is higher than the opportunity cost implied by anearlier move similar in magnitude when ecotourism service was increased from E1 to E2 Why so? This isbecause the increase in ecotourism is attained by the use of labor, capital and land that are progressively less

suited to this particular endeavor The reason for this is that although resources (labor, capital and natural resources) are generally fungible, they are not easily adaptable to alternative uses In other words, someresources are better suited for the production of some goods than they are for other goods

The case of Costa Rica illustrates increasing opportunity cost and its implication for resource use In1970s and early 1980s Costa Rica was pursuing an aggressive economic policy intended to expand its cattle-ranching sector One of the most notable effects of this policy was the rapid transformation of forestland topastureland However, only 10 percent of Costa Rica’s land is suitable for pastureland (Meyer 1993) Given

Figure 1.2 The production possibility frontier for Costa Rica

RESOURCES AND RESOURCE SCARCITY 9

this, continued expansion in cattle ranching could be realized only at increasing opportunity cost; that is, atincrementally faster rates of deforestation, which was the case during this period.

Furthermore, Costa Rica’s deforestation problem during this period was exacerbated by other economicand institutional factors Among others, these factors included (a) expanded use of marginal agriculturalland to feed a rapidly growing population; (b) distortion of market information by the government subsidies

to cattle-ranching operations (more on this in the next chapter); and (c) other institutional factors such as theland tenure system, unwarranted growth of the government sector, and misallocation of resources due togrowing external debt

What has been presented so far is a snapshot of a society’s alternative feasible and efficient outputchoices Furthermore, the set of feasible choices that faces a given society is subject to change astechnological advances occur The effect of technological advances is depicted by an outward shift of thePPF curve In this way, technological change expands a society’s feasible opportunity set Several factorscontribute to the expansion (growth) of the feasible combinations of goods and services that a given societycan produce Major factors include a discovery of new resources (such as a new oil deposit); an increase inthe labor force; an increase in production efficiency through factor substitutions (more on this in Chapter 3);and an advance in technology representing an entirely new production technique (more on this in

Chapter 3) It is through these sorts of change that a set that is infeasible at one point in time, such as point

M in Figure 1.2, could become feasible at some point in the future Technology fosters economic growth.

Last but not least, within this conceptual framework it is important to clearly understand the difference

between economic efficiency and optimality Efficiency simply indicates that the economy is operating on

its production possibility curve; that is, resources are used to their full potential However, as demonstrated

by the use of PPF, there is no one unique efficient point How, then, would society choose a point along its

PPF—as it must at a particular point in time? As briefly mentioned earlier, the neoclassical economicresponse to this question goes as follows: The “optimal” (or best) point along a given PPF of a given

country is ultimately determined by the preferences of consumers (citizens) This in turn will determine the

market prices for final goods and services produced in an economy at a given point in time Given these

prices, the optimal point along the production possibility frontier is that which yields the maximum market value Thus, for example, while points A and C are equally efficient, Costa Rica may choose point A (lessecotourism and more cattle ranching) on the grounds that it is associated with a higher level of market value

or vice versa This represents the core ideological position of neoclassical economics; that is, ultimatelywhat is “best” for a society is determined by consumers’ preferences At the same time, it also reflects thekind of value judgment economists are making in choosing a single point along a given productionpossibility frontier that theoretically contains an infinite set of efficient points

1.6 CHAPTER SUMMARY

The primary objective of this chapter has been to reflect on the following “preanalytic” conceptions thatneoclassical economists have of natural resources and their roles in the economic system

• Natural resources are scarce and as such they should be economized.

• Natural resources are essential factors of production An economy cannot produce goods and services

without the use of a certain minimum amount of natural resources However, to the extent that resources

are fungible, natural resources need not be seen as the sole or even the primary factor in determining an

economy’s production capacity For example, the economy of Costa Rica can, in principle, run without

10 THE “PREANALYTIC” VISION

its forestland, provided sufficient amounts of labor and other capital assets are available to offset itsabsence.

• Economists’ view of natural resources is strictly anthropocentric; that is, from an economic point of view

natural resources have no intrinsic value.

• The economic value of a natural resource is ultimately determined by consumers’ preferences.

• Consumers’ preferences are best expressed by a market economy, and for that reason the market system

is the preferred institution for allocating resources

• Scarcity of resources (including natural resources) is continually augmented by technological advances

• In the human economy, as depicted in Figure 1.1, the value of natural resources is determined by the flow

of services that these resources contribute to the economy For example, Costa Rica’s forestland isvalued to the extent that it serves as a continuous source of basic resources such as hardwood, drinkingwater, a place to attract tourists or in which to conduct scientific experiments, and so on

• This emphasis on the flow of resources rather than the stock of natural resources has two profound

implications:

1 The link between the flow of matter-energy in the economic process and the natural environment issimply overlooked This fact, together with the standard anthropocentric view of natural resources,

is likely to undermine the total value (economic plus noneconomic) of natural resources For example,

a justification for more conservation of Costa Rica’s forestland (such as a move from A to C in

Figure 1.2) would customarily be evaluated on the basis of its market (commercial) values This

approach, however, provides no explicit consideration of the fact that the forest is also home to

many rare plant and animal species which are important for the ecological integrity of the forest buthave little commercial value

2 The fact that the economic process continually depends on the natural world for both the generation

of raw material “inputs” and the absorption of waste “outputs” is simply taken for granted(Georgescu-Roegen l993)

A comprehensive understanding of the specific nature of the interrelationships between the human economyand the natural environment requires some basic knowledge of ecology—the subject matter of Chapter 4.Students who have a strong background in economics can proceed to Chapter 4 since the two chapters in

Part Two (Chapters 2 and 3) are primarily designed to offer a comprehensive review of basic economictheories and concepts relevant to environmental and resource economics

review and discussion questions

1 Carefully review the following economic concepts and make sure you have a clearunderstanding of them: factors of production, opportunity cost, increasing opportunity cost,efficiency, optimality, an economy, households, a firm, product and factor markets, intrinsicvalue

2 State True or False and explain why.

(a) Resources are of economic concern only if they are scarce

(b) There is no such thing as a free lunch

RESOURCES AND RESOURCE SCARCITY 11